Paying the price for restrictive trade

Problems with the emissions trading scheme.

European Voice

2/24/10, 9:11 PM CET

Updated 4/12/14, 7:08 PM CET

In the latest defence of his support for trade-restrictive carbon measures (“Tackling threats by finding room for free-riders”, 11-17 February), Eivind Hoff accuses me of using a dishonest argument when I say that the current design of the emissions trading scheme (ETS) in Europe could not be squared with rules of the World Trade Organisation (WTO).

He accepts my proposition, but then proposes a different ETS policy – a policy that the EU decided against when it last revised the ETS – and contends that if the EU were just to design an ideal policy, the WTO concerns would diminish.

Hoff therefore confirms what I have said throughout our exchange: there is a weak theoretical chance that trade-restrictive carbon measures – including border tax adjustments (BTAs) – could comply with WTO rules, but that small chance diminishes once you factor in practical aspects (a system should be administrable and not hurt Europe’s economy) and the reality that actual policy never is ideal. You simply cannot assume constant sunny weather.

Hoff’s sanguine approach to BTAs is also misplaced. From a legal point of view, BTAs are immensely complicated and a system like the one he proposes would very likely go beyond WTO rules on BTAs agreed in 1970 and confirmed since.

That is where the main legal difficulty kicks in. A defence of BTAs would end up under Article 20, which permits conditional and limited departure from core rules of the General Agreement on Tariffs and Trade (GATT).

Article 20 does not, however, permit a policy – such as Hoff’s – that is principally devised to address concerns about competitiveness.

Finally, Hoff would do well to check his economics. Import taxes increase the cost of importing, change relative prices within an economy, and hurt domestic firms whose supply chains are fragmented.

In the modern global economy, it is impossible to balance the costs of an import tax with an export rebate several steps later in the supply chain without hurting productivity.

Hoff may be willing to pay that price, but he should not pretend that a BTA would be economically neutral to European firms.